What happened

Ally Financial (ALLY -1.39%) had an excellent month as its stock price surged 32.9% in January, according to S&P Global Market Intelligence. The stock price is currently up about 43% year to date after a difficult 2022 when it fell almost 47%. 

Ally beat the markets in what was a good month overall, with the S&P 500 up 6.2%, the Dow Jones Industrial Average up 2.8%, and the Nasdaq Composite 10.7% higher in January.

So what

Ally Financial, the online bank and leading auto lender, saw its stock price surge after the release of its fourth-quarter earnings. The bank topped revenue and earnings estimates, but still had a year-over-year net income decline due to higher costs

Net financing revenue was up about 1% in the fourth quarter year over year to $1.674 billion, but for the full year. it jumped 11.1% to $6.85 billion. Total revenue was up 9% in the quarter to $2.2 billion, and for the full year it was up about 2% year over year to approximately $8.4 billion, a record. Net interest margin (NIM) for the full year was 3.85%, up 31 basis points.

Auto originations were down 15% in the quarter to $9.2 billion, with about 60% of them for used cars. The yield in the quarter was 9.57%. For the full year, originations were basically flat at $46.4 billion, with used car volume accounting for about 65% of total 2022 originations. The estimated auto yield was 8.24% in 2022, up from 7.10% in 2021, due to higher interest rates.

But on the bottom line, net income was down to $251 million, from $624 million in the fourth quarter of 2021. The primary reasons were higher provisions for credit losses due to credit normalization and the expectation for a slowing economy, as well as higher noninterest expenses related mainly to costs associated with the termination of a legacy pension plan.

Now what

Ally is off to a solid start, but it could be another volatile year, given the anticipated economic headwinds.

On the fourth-quarter earnings call, chief investment officer Brad Brown anticipated higher net charge-offs, given expectations for a mild recession, and expense increases. Overall, adjusted earnings per share (EPS) were anticipated to be around $4 for 2023, which would be down from $6 in 2022, with a NIM of around 3.5%.

But he anticipates earnings expansion in 2024 and beyond as the NIM moves back toward 4%. Overall, Ally stock is cheap, with a forward price-to-earnings ratio of 8 and a price-to-book ratio of 0.92. I like the stock as a long-term investment, particularly at this valuation.